Well, Monday ended the same way Monday began.
For the early risers who catch the Heisenberg daily kickstart (which honestly is the most important post of the day during the week), you’ll note that it was all about the dollar.
The reflation trade had, well, deflated in the overnight session as the world reacted to Trump’s inauguration speech (which I’m sick to death of hearing about).
The speech marked the second time in a week that Trump inadvertently verbally intervened in FX markets (the first being his comments to the Wall Street Journal). I’ve contended that jawboning (either intentional or accidental) poses a real risk in terms of FX vol going forward. Both Trump and members of his inner circle have variously demonstrated their willingness to talk down the “too strong” greenback and sure enough, the following headlines crossed at around 4:40 this afternoon:
- “From time to time, an excessively strong dollar may have negative short term implications on the economy,” says U.S. Treasury Secretary nominee Steven Mnuchin in written answers to questions from senators.
- “The strength of the dollar has historically been tied to the strength of the U.S. economy and the faith that investors have in doing business in America”
- Mnuchin remarks in written replies to senators’ questions in document obtained by Bloomberg
Well needless to say, that just added fuel to the fire. See if you can identify the precise moment those remarks hit the wires:
Right. So now we’ve got DXY under 100 and USDJPY hitting a 112 handle. “USD/JPY fund-related bids already in place during New York session between 112.50/70 are in play after U.S. Treasury Secretary nominee Steven Mnuchin wrote that an ‘excessively strong’ dollar may have negative impact on U.S. economy,” an Asian-based trader said an hour ago. For the techs out there, here are your levels to watch:
- USD/JPY — Approaching test of Nov. 24 low
- 3rd resistance: 116.07, 21-DMA
- 2nd resistance: 115.62, Jan. 19 high
- 1st resistance: 114.84, 50-DMA
- Spot: 112.55; pivot point: 113.30
- 1st support: 112.38 Nov. 24 low
- 2nd support: 111.63 Nov. 29
- 3rd support: 111.36 Nov. 28 low
And here’s a snapshot of USDJPY vol (note the historical percentiles):
More generally, this is how the reflation trade has played out since Trump officially took office:
As for stocks, well, it’s the same story. Reflation trade unwind up to an until Trump gives the market a reason to change its mind and get back on board with the narrative.
“The market is awaiting more clarity on the economic policies of the new US administration but is left to the vagaries of tweets and off-the-cuff comments in the absence of any coherent communication for the moment,” SocGen wrote on Monday afternoon. “That leaves S&P 500 and 10y Treasury tracking each other.”
Something tells me we’ll all be talking about the dollar around this time tomorrow morning EST.